Why should I invest in NFTs and how do I start?
Updated: Apr 26, 2022
The NFT (Non-Fungible Token) is a rare example of an arcane Web3 concept that has worked its way into the vocabulary of the mainstream. Forbes, Rolling Stone, and the BBC have all published pieces explaining (to a no doubt puzzled readership) what they are.
The attention has a lot to do with the serious financial waves the NFT phenomenon has made in the relatively brief period of time in which it has existed. Total sales of NFTs in 2020 came to just $250m. In 2021, sales in the third quarter alone were $10.7bn (see below).
The question that remains to be answered is: are NFTs ‘dead’, as many are already predicting, or are they here to stay?
What is an NFT?
Before we get on to the future, let’s start with the basics. It’s worth recapping the defining features of NFTs, as they are quite a trippy concept, and often misunderstood (including by NFT owners).
An NFT is a smart contract representing ownership of a unique item. This can be an item in the real world (such as a concert ticket) or the online world (such as virtual real estate in an online game).
An NFT does not represent copyright ownership (which the creator retains) or the right to copy (which in the case of digital assets like jpegs, anyone can still do). It’s been compared to owning the only autographed copy of a given creation.
It is also merely a record of the attributes of the item, and is not the same thing as the item itself.
(Sorry for all the bold, but misconceptions are many).
Because an NFT is a smart contract, it is not only immutable (hence ideal for establishing ownership of a digital asset), but also contains a record of all transactions in which it has been involved.
It can also be programmed to pay the original creator every time the ownership of the NFT changes hands, which is a great way of helping digital asset creators to monetize their (highly stealable) work.
The concept originated on the Ethereum blockchain, but is increasingly prevalent on other chains such as Binance and Tron.
Image by A M Hasan Nasim from Pixabay
Reasons to invest in NFTs
The recent boom in NFTs undoubtedly results as much from irrational exuberance as it does genuine recognition of long-term value. There will likely be numerous booms and busts as the NFT market approaches its future state of equilibrium.
Like most things in the decentralized economy, that future is unclear. This means that there is an opportunity for those who make good investments now, as well as considerable downside for those who make investments in the wrong areas of the NFT marketplace.
So, given that this is the case, why would you choose to invest in NFTs at this uncertain point in the cycle? What would you need to believe, or who would you need to be? Here are some initial ideas.
1. You know the underlying market well: much of the NFT sales volume is linked to artwork, such as the famous Beeple piece auctioned by Christie’s for $69m. If you understand the art world already, you are in a better position to outperform the other market participants.
2. You believe in the underlying individual: Jack Dorsey auctioned an NFT of his first tweet for over $2.9m. This is a collectible item that will likely increase in value for as long as Jack Dorsey remains famous. If history judges him a prime mover in 21st-century history, this value could compound over time.
3. You believe in yourself: in the short-term, there is always money to be made (by some) in buying and selling items on a speculative basis, just like in any volatile market. This is a path that very few people are able to tread with safety, particularly over a long period of time. But if it’s a risk you are willing to take, it is theoretically possible to come out on top.
4. You see a long-term utility play: NFTs may well become key to how society runs. For example, proof of identity and ownership in the real world could in the future become mediated purely via NFTs. “Ready Player One”-type alternative realities could rely on NFT technology to manage on-chain crypto-civilizations. You should invest in NFT-related infrastructure if you believe it has applications that most people don’t yet realize.
How to determine the value of an NFT
It won’t surprise you to learn that the jury is still out among the business school professors about how to precisely determine the value of an NFT.
At this stage, with many NFTs of dubious provenance and equally dubious individuals looking to cash in on the craze, determining their worth is as much about identifying scams and/or junk as it is about arriving at a precise, defensible valuation.
Here are three factors listed by Binance as points you should consider when evaluating a potential buy:
While the whole point of the NFT concept is to introduce ‘scarcity’ to the digital realm, the underlying asset needs to itself be unusual. One-of-a-kind and first-of-a-kind are good candidates, and being attached to a celebrity doesn’t hurt either.
As NFTs are just code and have no extrinsic use, this mainly applies to the decentralized gaming world, where unique objects such as helmets, swords, and castles need a trustless mechanism to regulate ownership, and can be ‘used’ within the game itself.
As already noted, NFTs can be linked to items in the real world, and hence can derive value from those items. At the moment, most of these real-world items are short-lived, such as tickets to exclusive events. This could change as NFTs grow in prevalence.
So much of the value of NFTs at this point in time (i.e. putting the long-term to one side for the moment) is based on pure perception, and as such may not obey rational rules.
Using the above factors will likely help keep you grounded and avoid being left holding the bag when the music for this particular section of the party cuts out.
How to start investing in NFTs
Armed with the above knowledge, how would you get started on an NFT investing journey?
Assuming that you have a wallet that is NFT compatible, your main decision is what NFT marketplace to trade on. There are different marketplaces for different NFT standards, including OpenSea, Rarible, and Nifty Gateway.
There is a divide between centralized (such as OpenSea) and decentralized marketplaces (Rarible). There are also marketplaces that offer a version of each (Binance NFT Marketplace and Featured by Binance). If this split doesn’t mean much to you, it probably shouldn’t feature in your decision.
Each marketplace has different currency requirements depending on the blockchain it uses, so you may need to purchase specific currencies in order to trade.
The marketplace is not just a means of locating opportunities but also filtering out scams. For example, it is possible to mint an NFT for another artist’s artwork and sell it as your own., and unfortunately this does happen.
You should therefore ascertain that the platform has strict artist verification protocols, in addition to solid security procedures for your own data and access (e.g. 2-stage verification).
How to Buy & Sell NFTs on the Binance NFT Marketplace
As all the marketplaces have different procedures for buying and selling NFTs, we’re going to take the Binance marketplace as an illustration due to its simplicity. This is covered in more detail on their website.
Step 1: Get an account. This process will require you to verify your identity.
Step 2: Deposit funds. Before you can buy an NFT, you need to have currency (in this case BNB) to pay for gas fees. You can purchase BNB using your credit or debit card, or connect your wallet to your Binance NFT wallet.
Step 3: Search the marketplace. There are various criteria you can use to narrow your search. You will be wanting to check the reputation of the artist, and how thinly or well traded the artwork is or has been. Binance also have a 'blind' marketplace where users can get hold of new and beta releases (mostly suitable for gaming).
Step 4: Make a bid or purchase. For NFTs being sold via auction, you will need to make a bid above the stated floor, or one that exceeds the latest bid by at least a given markup. Fixed price offers can be purchased immediately.
Step 5: Make a sale. When you are ready to sell your NFT, if you wish to sell via auction, you must stipulate a minimum bid, or else set a fixed price. In either case, you can select the currency in which you want to be paid, and set an end date for the sale period (max 30 days). There will then be an internal review process (4-8 hours), and upon receiving confirmation you can choose when to go live.
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